NTTA's Proposal for SH-121, Is It Better Than Cintra's?

Many questions need answers before taxpayers believe agency's numbers

Since the May 3, 2007, release of Reason Foundation's new research paper, Tolling and Public-Private Partnerships in Texas: Separating Myth from Fact, (available at reason.org/TX_toll_roads_working_paper.pdf) the North Texas Tollway Authority's (NTTA) board of directors approved the issuance of a proposal for the SH-121 toll road project in Denton and Collin counties north of Dallas. Reason's report provided a critical assessment of claims that public toll authorities could offer more value than private toll concessions, but until NTTA's announcement, no public toll authority had attempted to go head-to-head versus the private sector.

At first glance, NTTA's $3.3 billion bid appears to top the $2.8 billion bid of Cintra, the private firm already selected for the concession project by the Texas Department of Transportation (TxDOT) in a competitive bidding process. According to NTTA, its proposal provides more money to the region, uses a more conservative demographic forecast, would have lower rates of toll increases, and would strengthen its ability to build new roads in the future. Essentially, the message from NTTA is: "trust us, we can do it all."

Given that there is no free lunch in the transportation world—-we are going to pay for new roads through tolls or taxes, or we will pay for not building new roads with wasted time in traffic jams—-claims like NTTA's merit careful analysis and consideration, especially when many billions of dollars of transportation investment, as well as the quality of life of Metroplex residents, is at stake. Unfortunately, all that NTTA has delivered thus far are promises and platitudes via a press release and PowerPoint presentation; the full, detailed proposal—including all of the assumptions and projections critical to evaluating it—is still several weeks away from being delivered to the Regional Transportation Commission (RTC).

As North Central Texas Council of Governments transportation director Michael Morris astutely pointed out to the RTC during its May 10 meeting, evaluating the Cintra and NTTA SH-121 proposals is not just a simple matter of comparing two documents. Also key will be understanding the opportunity costs associated with each proposal, and their relative impact on the region's ability to provide the bundle of new road projects necessary to keep pace with growth. For example, if NTTA's financial proposal would require leveraging its existing system to facilitate this one project, it could overload the agency with debt and jeopardize its ability to build needed, new toll projects in the future, such as the Trinity Parkway, SH-360, and SH-170.

Since NTTA has not yet made its full proposal publicly available, it is not yet possible to prepare a detailed analysis and to truly assess the trade-offs, opportunity costs and risks in it. However, policymakers, media, and citizens can and should start asking a number of questions about NTTA's proposal, including:

Is NTTA proposing to mortgage their entire toll road system to generate the $2.5 billion up-front concession payment? Even if they're able to do that for this one project, how would it affect the agency moving forward in terms of its bond rating and indebtedness? Moody's has already warned of a downgrade (leading to higher borrowing costs) if the proposal moves forward.

How would NTTA's finance plan fit into the larger context of sustainable, regional congestion relief? Would it harm their ability to finance other vital transportation needs in the future? Since private concessions finance each individual toll road based on its own revenue stream, that approach could be used again and again. But NTTA would likely find it difficult to refinance its system again in order to raise future funds for new projects.

One of the key benefits of private concessions is that they transfer all of the risks of construction cost overruns and traffic and revenue shortfalls to the private sector partner. How would these risks be assigned under NTTA's proposal? Could it possibly achieve the same balancing of risks that we'd see under a concession with Cintra?

What are the differences between the traffic and revenue forecasts used in the Cintra and NTTA proposals? NTTA asserts that it is basing its traffic forecast on a more conservative model than those received from TxDOT (and presumably Cintra, as well), and it also claims that it will cap regular toll-rate increases at 2.75%, while the Cintra proposal uses slightly higher caps. If NTTA is anticipating lower traffic and less revenue than Cintra, then it's difficult to see how it could produce more value.

Public-sector toll agencies have always found it politically difficult to raise tolls, even on an infrequent, one-time basis. But like Cintra, NTTA's projected future toll revenues are based on annual toll increases to keep up with inflation. Through what mechanism will NTTA be able to guarantee that it will be able to raise tolls every year for 50 years without political interference?

What priority will annual lease payments to the RTC have for NTTA? As a private concession, the annual lease payment from Cintra would have the same priority for payment as operating and maintenance costs, and it would be paid before debt service, taxes, or dividends to shareholders. Would it hold the same priority in a NTTA deal, or would the annual lease payment only be made after paying operating costs and debt service, if there's any money left over?

What discount rate did NTTA use to estimate the present value of future toll revenues? As discussed in Reason's research paper, a key to understanding NTTA's proposal is understanding the discount rate they use and whether or not it's appropriate for a public-sector toll authority. A TxDOT analysis of NTTA's March 2007 proposal found that NTTA was using an unrealistically low discount rate of 5 percent when, given a comparatively higher risk profile when done as a public-sector project, a rate of between 7 to 9 percent would have been appropriate. After re-running the numbers with a more realistic discount rate, Cintra's SH-121 proposal produced greater dollar value for the public sector than NTTA's did.

What is the source of NTTA's claim that its operations and maintenance costs will be almost 70 percent lower than Cintra's? Isn't it more reasonable to expect the private sector to be leaner and more efficient than the public sector?

Is it fair to give NTTA—who previously opted not to submit a proposal on the SH-121 project even when they had the opportunity—the ability to belatedly bid on this project after they've had the chance to study Cintra's proposal? If the state were to ultimately issue a waiver releasing NTTA from its agreement not to bid on this project, should Cintra be allowed to submit a best and final bid if it so chooses? For that matter, should all of the firms that submitted proposals for the SH-121 project be given a chance to produce a new bid after studying the NTTA proposal?

What sort of signal would changing the rules of the game in the middle of the SH-121 procurement process send to potential private investors for future projects?

What are the legal implications of changing the procurement process on the SH-121 project midstream?

Understanding the answers to all of the above questions is crucial to making an informed assessment of whether NTTA has produced a viable bid for the SH-121 project, or whether NTTA's bid is full of risky, extravagant promises that will be hard to deliver and would threaten the region's ability to address its future mobility needs.